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Should You Convert Your Startup From A California LLC To A Delaware Corporation?

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This article was originally published on Forbes. By: Doug Bend Most California LLCs that are small businesses never convert to a Delaware corporation for five reasons. 1. In addition to paying the California annual franchise tax you would also need to pay the Delaware annual franchise tax. 2. You would also need to have a… Read More

This article was originally published on Forbes.

By: Doug Bend

Most California LLCs that are small businesses never convert to a Delaware corporation for five reasons.

1. In addition to paying the California annual franchise tax you would also need to pay the Delaware annual franchise tax.

2. You would also need to have a registered agent for service of process in Delaware.

3. It often costs more to have a CPA prepare a corporate tax return than a partnership tax return for a multiple member LLC that has not made a tax election. A single member LLC that has not made a tax election does not need to file a tax return at all.

4. It costs several thousand dollars in legal and government filing fees to convert a California LLC to a Delaware corporation.

5. There are additional basic requirements for maintaining a Delaware corporation. For example, Delaware corporations are required to have annual Board and shareholder meetings or written consents in lieu of a meeting whereas this is not the case for California LLCs. Also, if you convert your California LLC to a Delaware corporation you would also have to file the Delaware annual report by March 1st of each year. The annual consents and reports do not take long to complete, but they are not fun and are items you do not have to worry about as a California LLC.

These additional costs and compliance headaches are why most small business owners never convert their California LLC to a Delaware corporation.

But startups are not like most small business owners.

Instead, the conversion is often a necessity if you plan to raise outside third-party financing for your startup; the drawbacks are outweighed by the benefit of the investment round costing less in legal expenses if it is a Delaware corporation instead of an LLC. This is because most of the seed stage financing documents that have been open sourced were drafted for corporations and not for LLCs. For example, many early-stage financing rounds use Y Combinator’s SAFE template, which was intended to be used by corporations.

Also, your investors will most likely require that your company be a Delaware corporation for three reasons.

1. Many investors are more familiar and comfortable with Delaware corporations as more than half of publicly traded companies were formed in Delaware.

2. Corporations are taxed differently than LLCs that have not made any tax elections. If an investor invests in an LLC that not has made any tax elections and the LLC has net profits, the investor might get a K-1 for each tax year and need to pay income taxes on their proportionate share of those profits even if the investor might not have received any distribution payments from the company. In contrast, with a Delaware corporation, the profits and losses from the company stay locked up at the entity level unless there are any distribution payments to the shareholders.

3. Startups that are raising capital are usually looking to grow and scale. It is easier to issue equity to employees, advisors and service providers from a corporation with a stock plan than it is from an LLC.

For all of these reasons, while it is very rare to see a Mom and Pop shop, such as a restaurant or a consulting company, convert from a California LLC to a Delaware corporation, it is why you often see startups make the conversion if they are not already a Delaware corporation before raising investment capital from investors.

As you can see, the cost-benefit analysis for whether to convert your California LLC to a Delaware corporation gets complicated quickly. If you are thinking of making the jump, you would be well served to first check in with your corporation’s CPA and business attorney to help make sure that the transition would be the best decision for you and your company.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Forming a 501(c)(3) Exempt Entity

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By: Alyssa Ziegenhorn Are you interested in forming a tax-exempt nonprofit corporation, or applying for tax-exempt status for your existing nonprofit? Nonprofit entities can file Form 1023 with the IRS to request exemption from taxes under Section 501(c)(3) of the Internal Revenue Code because of the charitable programs or actions they undertake. Tax-exempt status comes… Read More

By: Alyssa Ziegenhorn

Are you interested in forming a tax-exempt nonprofit corporation, or applying for tax-exempt status for your existing nonprofit? Nonprofit entities can file Form 1023 with the IRS to request exemption from taxes under Section 501(c)(3) of the Internal Revenue Code because of the charitable programs or actions they undertake. Tax-exempt status comes with many benefits, but it can be tricky to get approval.

Here we will discuss a very important distinction between the two types of classifications on the application: private foundations and public charities. Having a clear picture of which classification you are requesting will help you avoid potential pitfalls on the application. This means your application can be approved much more quickly. It is standard procedure for the IRS to classify an initial 501(c)(3) request as a private foundation rather than a public charity, although they don’t officially publicize that stance. So what is the difference between the two?

1. Private Foundations

When applying for 501(c)(3) status, the IRS will recognize qualifying nonprofits as a private foundation by default, unless cause is shown and a request made that it should be approved as a public charity. Private foundations are typically established by an individual, family, or corporation to support charitable activities.

Funding Source and Spending

Funding for private foundations usually comes from an individual, a family, or a corporation, who then receives a tax deduction for donations. Private foundations are not required to prove that their funding comes from the public. Private foundations are not prohibited from public fundraising, but it is uncommon.

Private foundations usually make grants to public charities, although they can sometimes conduct their own charitable activities.

Governance

Because a private foundation is usually closely controlled by an individual, family, or organization, they retain much greater control of the organization. They get to choose the mission, how to invest the funds of the foundation, how to spend those funds, and who is included on the foundation’s board. Private foundations can be governed solely by donors or a board made up of family members and individuals chosen by donors, regardless of relationship to each other and/or the foundation.

Reporting Requirements

Private foundations are required to file Form 990-PF, a tax return form which includes the private foundation’s assets, financial activities, trustees and officers, and a complete list of grants awarded for the specified fiscal year, including the recipient’s names, locations, and grant amounts. At least 5% of the private foundation’s assets must be given to charitable causes each year. 

2. Public Charities

To be recognized as a public charity as opposed to a private foundation, the applicant must specifically request public charity status and be able to demonstrate that they meet the requirements. The two most important requirements are funding source and governing body. Public charities provide higher tax benefits for their donors, but are subject to stricter qualifications than private foundations.

Funding Source and Spending

Public charities get most of their financial support from the public via fundraising: soliciting donations or grants from individuals, the government, corporations, and private foundations. To maintain tax-exempt status, a public charity must verify to the IRS that they receive a substantial portion (33.33% or more) of their support from the general public.

Public charities spend their money to conduct charitable activities and/or provide services. They rarely make grants (although they can).

Governance

Public charities must have a diverse board of directors, and no more than 49% of the board can be made up of “interested directors.” Interested directors are anyone who has been compensated by the corporation for their services in the last 12 months or any member of that person’s family. The majority of the board also cannot be related by blood or marriage.

Reporting Requirements

Public charities are required to file Form 990, which is similar to form 990-PF but requires less information. Public charities must report their assets, total figures for donations and grants received (but not the names, addresses, or amounts of contributors), board and top staff members, and whether the charity makes grants.

So, Which One do I Pick? There are pros and cons to each classification, and the determination of which one makes the most sense for your nonprofit will depend on your corporate structure, your mission, and your fundraising goals. If you are interested in learning more about starting a nonprofit corporation, or submitting a 501(c)(3) application for an existing nonprofit, please reach out to us at info@bendlawoffice.com or (415) 633-6841.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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The 10 Steps For Converting Your California LLC To A Delaware Corporation

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This articles was originally published on Forbes. By: Doug Bend and Robin O’Donnell Most startup founders form a Delaware C corporation as it is the preferred legal entity of most investors. However, some founders instead form a California LLC when they expect to have losses their first few years and would like for those losses… Read More

This articles was originally published on Forbes.

By: Doug Bend and Robin O’Donnell

Most startup founders form a Delaware C corporation as it is the preferred legal entity of most investors. However, some founders instead form a California LLC when they expect to have losses their first few years and would like for those losses to flow down to schedule C of their individual tax return to offset other income.

Once the company has gained traction and is ready to raise outside venture capital financing, the founder might then convert the LLC to a Delaware corporation by completing the following 10 steps:

1. Member Approval

A plan of conversion will need to be approved by the members of the converting LLC.

2. Filings with California and Delaware Secretary of State’s Office

Separate conversion filings will be required in both California and Delaware. In addition, a Certificate of Incorporation must be filed in Delaware.

3. Internal Documents

Once the conversion filings have been approved, you will need to prepare all of the internal documents for the corporation such as the bylaws, stock purchase agreements, indemnification agreements and the initial Board consent.

4. City Business Registration Certificate

In addition to the internal documents, you will need to update the city business license to include the new legal name of the entity.

5. Fictitious Business Name Statement

If will be conducting business under a name other than the full legal name of the corporation, you will need to file a new Fictitious Business Name Statement with the county clerk’s office.

6. Publication of the Fictitious Business Name Statement

Once you get the endorsed Fictitious Business Name back from the county clerk’s office, you will need to have it published in a legally adjudicated newspaper.

7. California Employment Development Department

If your company is running payroll for employees, you will need to update the Employment Development Department (EDD) of the entity conversion.

8. Seller’s Permit

If your company collects sales tax, you will need to update the company’s account with the California Department of Tax and Fee Administration. If you have any trouble, you can call the Department at 1-800-400-7115 and they will walk you through the process.

9. IRS

You will need to work with your CPA to update the IRS on the conversion. You can read more here on whether you will need to get a new Federal Employer Identification Number (EIN).

10. Vendors

Lastly, you will need to update the company’s vendors on the entity conversion. For example, you will need to update the company’s bank account and insurance policies to include the new legal name of the corporation.

You should consult with your attorney as your company might have different requirements and with your CPA to make sure that you understand the tax ramifications of converting your California LLC to a Delaware corporation, but this checklist is a good starting point for putting together a game plan for the conversion. As you can see, several government agencies and vendors would need to be updated, so you should make sure that the benefits of making the conversion will outweigh the time and costs.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Here’s a Tip: Tipping Rules for Restaurants in California

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By: Alyssa Ziegenhorn Tipping is a hot topic in the restaurant industry, especially with the recent rise in online and to-go ordering. We’ve gathered answers to some of the most common tipping questions for restaurant owners, managers, and employees. Who Owns Tips? Under both federal and California state law, tips belong to the employee, not… Read More

By: Alyssa Ziegenhorn

Tipping is a hot topic in the restaurant industry, especially with the recent rise in online and to-go ordering. We’ve gathered answers to some of the most common tipping questions for restaurant owners, managers, and employees.

Who Owns Tips?

Under both federal and California state law, tips belong to the employee, not the employer. Tips are a gift from the customer to the employee and so the employer cannot keep any portion of the tip.

Can Restaurant Owners Take a “Tip Credit”?

Federal law allows a restaurant to count tips toward employees’ minimum wage. This means restaurant owners can pay employees as little as $2.13/hour as long as the employee’s tips make up the rest of the difference to the federal minimum wage of $7.25/hour.

California law does not allow this practice. In California, employers must pay the full state minimum wage regardless of the amount of tips an employee receives. As of Jan. 1, 2022, state minimum wage for employers with less than 26 employees is $14 and $15 for employers with 26 or more employees. Some cities have their own minimum wage higher than the state requirement.

What is Tip Pooling?

Employers can mandate tips be shared between a pool of eligible employees. This practice is known as “tip pooling.” Although employees are the rightful owners of tips, both California and federal law allow owners to mandate tip pooling as long as owners, managers, and supervisors do not receive any tips from the pool.

Who Can Participate in a Tip Pool?  

The Department of Labor implemented a rule in 2011 prohibiting employees who don’t usually receive tips, such as cooks and dishwashers, from being included in tip pools. In 2018, Congress passed a law forbidding employers from taking employee tips. The DOL provided guidance that non-tipped employees could be included in tip pools in certain circumstances, and formalized this position in 2020 with revised regulations. These regulations took effect on March 1, 2021.

Federal: Under the DOL regulations, employers can include employees who don’t usually receive tips (nontraditional employees) in a tip pool provided they (i) pay at least federal minimum wage and (ii) do not take a tip credit.

California: Because California does not recognize a tip credit toward minimum wage, the requirement is a bit different from the federal rule. In California, mandatory tip pooling is allowed as long as the employees in the pool are part of the “chain of service.” This just means employees must have some relationship to the customer experience, but aren’t necessarily serving the customer directly.

Under both rules, it is important to remember that owners, employers, managers, and supervisors cannot participate in the tip pool.

Are There Any Exceptions?

If a manager or supervisor also performs the same duties as a regular employee (for example, working a shift as a server or host) they can participate in the tip pool for purposes of that shift. Owners, however, can never participate in a tip pool. If an owner receives a tip directly from a customer while performing serving or other regular employee duties, they may keep it.

How Should Tips Be Distributed?

The rules are a little fuzzy on this subject, but most sources agree that it’s best to set up a “fair and reasonable distribution” of the tips.⁠ This simply means the employer has an impartial system for deciding how much is paid to each employee. The distribution % of tips from the pool must be based on a fair system, generally in proportion to the amount of service the employee provided to the customer. Usually this means the majority should go to the server and smaller portions to the busser, bartender, or host. The California Department of Labor Standards Enforcement has found 80% to wait staff, 15% to bussers, and 5% to bartenders to be legal in a traditional restaurant setting. However whether something is “fair” depends on the particulars of each business—so this isn’t the only possible split.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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10 Steps For Changing The Legal Name Of A California LLC

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This article was originally published in Forbes. By: Doug Bend Business owners sometimes would like to change the full legal name of their California limited liability company (LLCs). The three most common reasons for changing the name of an LLC include: the products or services the LLC offers have changed, there has been a legal challenge… Read More

This article was originally published in Forbes.

By: Doug Bend

Business owners sometimes would like to change the full legal name of their California limited liability company (LLCs). The three most common reasons for changing the name of an LLC include: the products or services the LLC offers have changed, there has been a legal challenge to the name or the owners have thought of a better name.

There are typically 10 steps to changing the legal name of an LLC in California. 

1. Member Resolutions

First, you should review your operating agreement to see what the voting requirements are to change the legal name of the LLC. Most likely you will need written resolutions that are signed by the members who own a majority ownership interest in the LLC to document that a sufficient number of the members approve of the name change.

2. Amendment To The Articles Of Organization

When you formed the LLC, you filed articles of organization with the California Secretary of State’s Office. Those articles included the full legal name of your LLC. You will now need to file an amendment to the articles to change that name.

3. Statement Of Information

Once the amendment to the articles of organization has been approved, you will need to file an updated statement of information with the California Secretary Of State’s Office. This is a one-page filing that can be submitted on the Secretary of State’s website.

4. City Business Registration Certificate

You will also have to update the city business license to change the legal name of the entity.

5. Fictitious Business Name Statement

If you are conducting business under a name other than the full legal name of the LLC, you will need to file an updated fictitious business name statement with the county.

6. Publication Of The Fictitious Business Name Statement

Once you get the endorsed fictitious business name statement back from the county, you will need to have it published in a legally adjudicated newspaper.

7. California Employment Development Office

If your LLC is running payroll for its employees, you will need to update the Employment Development Office (EDD) of the name change.

8. Seller’s Permit

If the LLC collects sales tax, you will need to update the company’s account with the California Board Of Equalization. If you have any trouble, you can call the Board Of Equalization at 1-800-400-7115 and they will walk you through the process step-by-step.

9. IRS

You will need to work with your CPA to update the IRS of the LLC’s new legal name.

10. Vendors

Lastly, you will need to update all of the LLC’s third-party vendors. For example, you will need to update the LLC’s bank account and insurance policies to include the new legal name of the LLC.

You should consult with your attorney as your LLC might have different requirements, but this checklist is a good starting point for strategizing on how to change the legal name of your company. As you can see, numerous government agencies and vendors would need to be updated and so you should make sure that the new name is one you love much more than your LLC’s current name.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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HOW DERIVATIVE: A GUIDE TO FAN FILM PRODUCTION

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By: Brandon Shelton I have recently been absolutely obsessed with Bo Burnham’s latest Netflix special “Inside.” There are several moments of relatability and genius, but one particular statement that keeps eating away at my soul comes from the carnival tune Welcome to the Internet: “Could I interest you in everything all of the time? A… Read More

By: Brandon Shelton

I have recently been absolutely obsessed with Bo Burnham’s latest Netflix special “Inside.” There are several moments of relatability and genius, but one particular statement that keeps eating away at my soul comes from the carnival tune Welcome to the Internet: “Could I interest you in everything all of the time? A little bit of everything, all of the time?” The Internet has rapidly gone from a wide-open plane of unfilled memory to being stuffed to the brim with more information and content than any mortal could ever possibly digest. With that rapid evolution comes the desire by others to add their own content, which oftentimes is largely derivative of other content that already exists (I mean, everything derives from Shakespeare anyways, right?).

Derivative Works

The concept of derivative content isn’t anything new to the world of fiction, nor is it exclusive to the Internet. There are plenty of unauthorized examples in literature, such as The Wind Done Gone by Alice Randall and 60 Years Later: Coming Through the Rye by John David California. However, the Internet has certainly provided a very easy to access platform upon which to submit derivative content, authorized or not. A prime example of such derivative content that has become far easier to produce and access is the fan film. Indeed, a recent favorite of my own was a short (surprisingly well done) X-Men film centered on the fan favorite character Gambit. Lest there be any doubt: this fan film was not authorized by Marvel.

Derivative Work Lawsuits

A recent, and very valid, question that was posed to me was: how can I avoid a lawsuit when creating a fan film?

As an initial matter, there is no way to “avoid” a lawsuit from anyone over anything. Anyone is allowed to file a lawsuit, absent some clear misconduct where the use of the legal system is being abused. If there is an owner of any copyrighted content, or its underlying creative aspects, such as its well-developed characters and storylines, they always have a right to bring a lawsuit if anyone is infringing on their rights associated with copyright ownership. Under § 106(2) of the Copyright Act, the copyright owners have the exclusive right to prepare and authorize others to prepare derivative works based on an already existing work of authorship. By creating an unauthorized derivative work of any work of authorship, you may already be in the territory of infringing on the rights of the copyright owners.

At this point you may be asking yourself: if the right to sue is so strong, how in the world is there so much fan fiction and fan film out there??? The answer is a bit complicated, but the short answer is: because the owners probably have allowed the derivative content to exist. Oftentimes copyright owners gladly allow fan-created derivative content to exist without any qualms, especially in the cases where the fan fiction doesn’t provide the creator with any commercial benefit and is appropriately attributed. Part of the thinking is that allowing robust fan interaction can only stand to benefit the commercial demand for the original works themselves. Additionally, a well-funded copyright owner will rarely win any new fans by quashing the creation of derivative fan fiction that doesn’t generate any income to the fan creator.

An example that comes to mind from my wee days in law school is the plethora of Harry Potter fan fiction available in every corner of the Internet. Author J.K. Rowling famously was flattered and gave her blessing for fans to develop and post any fan fiction online, provided that such derivative works were submitted without any commercial purpose.[i] Rowling is quite serious about the non-commercial purpose, as she successfully sued a creator of a Harry Potter encyclopedia.[ii]

One Limited Exception: Fair Use Doctrine

As with every conversation I have in describing the law to both of my fans (of which my mom is at least one), there’s always an exception out there. Section 107 of the Copyright Act provides that the creation of derivative works “for purposes such as criticism, comment, news reporting, teaching…, scholarship, or research, is not an infringement of copyright.” This is otherwise known as the Fair Use Doctrine. Part of the justification for Fair Use is trying to resolve the inherent conflict with the idea that the First Amendment of the U.S. Constitution allows for criticism and education, and the idea that a copyright holder should have the exclusive right to copy, use, and profit from the work.

Though Section 107 provides a pretty clear and explicit exception to the exclusive rights of the copyright owner, application of the Fair Use Doctrine is not always so clear. Courts will apply a four-factor analysis that considers:

  1. the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
  2. the nature of the copyrighted work;
  3. the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
  4. the effect of the use upon the potential market for or value of the copyrighted work.[iii]

If you’d like some good reading material on how courts view derivative works under the Fair Use doctrine, feel free to check out the 11th Circuit’s decision establishing that The Wind Done Gone was a parody work protected by the Fair Use Doctrine.[iv]

The Takeaway

For brevity’s sake, I’d just like to offer up some diatribes I have encountered throughout my career. One of the first attorneys I worked for was reluctant to rely upon the Fair Use Doctrine, primarily because it already establishes an admission that you are copying the original work to some degree, which isn’t a great place to start. However, if we are talking about clearly and purely critical works (for example, a news piece or documentary criticizing the work), Fair Use Doctrine is a critical tool used by filmmakers and journalists to allow for such criticism. In my work with documentary filmmakers, they lean as much as they can on the Fair Use Doctrine to allow use of a multitude of works in their final product, and their insurers specifically require a preemptive attorney input on Fair Use considerations to even allow distribution of the derivative work.

Obviously there are some substantial differences between a critical documentary and a fan film. If we are talking about a fan film that is not a parody (meaning it simply builds on the original work, and there isn’t a great argument that the derivative work is critical of the original), you will have to tread carefully. First and foremost, most copyright owners are going to take issue if you create the fan film with the purpose of deriving any kind of commercial benefit (i.e. getting paid for ads on YouTube). However, many might be willing to turn a blind eye if you simply make it for fun, without any for-profit goals in mind. If the underlying work itself is a very well-known work with a robust fan fiction community, it would be worth your while to see if there are any publicly available news or statements by the owner expressing approval of non-commercial fan fiction, or if there is already a large and well-visible community producing fan films or fiction.

If it is still difficult to glean whether or not the owner allows for fan works, it would also be helpful to see if the owner is particularly litigious on fan created derivative works. A simple Google search of the work itself plus “lawsuit” might provide some insight into this. Reddit forums and other postings might also be helpful to see what other fans have been able to safely create.

It also doesn’t hurt to ask. If the work is so far a relative unknown, you can always reach out to the publisher of the work, or the author themselves to see what their policy is on fan fiction and fan films. They will almost always be pretty clear about what their guidelines are in allowing fan created content. A good deal of publishers and authors will also provide a free, limited license to create such works, provided that the work itself is also offered up for free.

The TL;DR answer to the question posed is: there is not necessarily a way to prevent a lawsuit for a fan film, as anyone can file a lawsuit. But if you do some research on the underlying work, you can give yourself a good idea of whether or not there will be pushback from the copyright owners, or if they have already given their stamp of approval on fan-created derivative works. If your fan film is a parody that is clearly critical of the original work, there is definitely some protection afforded by the Fair Use Doctrine, but it is expensive to find out if you are right under that exception. For that reason, it’s a good idea to see what others have already done before you, or even reach out to the copyright holder.

[i] Waters, Darren. BBC News. Rowling back Potter fan fiction; available at http://news.bbc.co.uk/2/hi/entertainment/3753001.stm.

[ii] Eligon, John. NY Times. Rowling Wins Lawsuit Against Potter Lexicon; available at https://www.nytimes.com/2008/09/09/nyregion/09potter.html.

[iii] 17 U.S. Code § 107.

[iv] Suntrust Bank v. Houghton Mifflin Co., 268 F.3d 1257 (11th Cir. 2001).

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Trademark Modernization Act: Providing New Tools for Trademark Applicants

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By: Vivek Vaidya After years of fraudulent trademarks stacking up in the United States Patent and Trademark Office (USPTO) database, major reform is under way.  The Trademark Modernization Act will go into effect in December of 2021 to provide new tools for applicants to overcome certain refusals to their trademark applications. Specifically, the new processes… Read More

By: Vivek Vaidya

After years of fraudulent trademarks stacking up in the United States Patent and Trademark Office (USPTO) database, major reform is under way.  The Trademark Modernization Act will go into effect in December of 2021 to provide new tools for applicants to overcome certain refusals to their trademark applications.

Specifically, the new processes will focus on challenging trademark applications and registrations that contain inaccurate use claims. The hope is that business owners in the U.S. will make smarter and more honest branding decisions for their products and services.

The TMA will set forth the following new procedures:

Two new post-registration proceedings can be filed with the USPTO Director Institute, in order to request the cancellation of unused trademarks.

1) Expungement: one may request the removal of specific goods/services in a trademark registration because the registrant never used the trademark in US commerce.

2) Reexamination: one may request the removal of specific goods/services by arguing that the trademark was not in use by a particular date as alleged by the registrant, usually by showing the specimen showing the trademark in use was not accurate.

After initiating either of these proceedings, the registrant will have an opportunity to respond with evidence that the information in their trademark registration is accurate.

Changes to the Letter of Protest Procedure.

The TMA codifies the Letter of Protest process, which has been long standing but seldom used.  A Letter of Protest allows third parties to submit evidence prior to an application’s registration that challenges its eligibility to be registered.

Changes to the process and rules around seeking injunctive relief.

As per the TMA, a trademark owner who is seeking injunctive relief (a fancy term for getting someone to stop doing something) is entitled to an arguable presumption of irreparable harm upon a finding of infringement based upon the facts of the case. This rule will help trademark owners enforce their rights against infringers in federal court.

Conclusion

The TMA provides trademark applicants with new tools to challenge trademark registrations that are blocking against their applications.  Instead of costly and lengthy Opposition and Cancellation Proceedings, the expungement, reexamination and Letter of Protest procedures will make it easier and more efficient for rightful trademark owners to establish their rights through registration with the USPTO.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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